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Eavex Ukraine Fixed Income Weekly: Feb 6

Ukrainian sovereign Eurobonds finished lower last week as confidence took a hit from the first major escalation of the Donbass military situation in more than a year. Heavy artillery and rockets hit both separatist-controlled Donetsk and its suburb Avdyivka, which is on the Ukrainian side of the line and where a strategically important plant for the country’s steel sector is located. Some analysts said this escalation stems from Russia wanting to test the reaction of new US President Trump, while others suggested Kyiv may also have been behind the fighting in an effort to keep the conflict in the news. Meanwhile, Trump spoke by phone with President Poroshenko on Saturday (Feb 4) in a conversation that both sides described as positive in tone. A separate new problem in regard to the conflict zone emerged when Ukrainian militant groups, including MPs, conducted an unauthorized blockade of a railway line used for transporting cargo to and from the occupied territories. Ukraine’s government still has to rely on coal extracted on the territories, as there is no short-term technical means to switch the entire power generation sector to run on imported coal. Fortunately, this winter has not been particularly cold, and Ukraine’s current natural gas stockpile of near 10bn cubic meters should be enough to get through the remainder of the heating season.

The longest outstanding Ukrainian Eurobonds with maturity in 2027 declined in price by 1.7% over the week to close at 92.4/93.4 (8.9%/8.7%). The shortest outstanding sovereign issue, Ukraine-19s, edged down 0.5% to end at 99.5/100.3 (8.0%/7.6%). On the financial side, we do not see Ukraine having any problem to service its foreign debt in 2017, with the estimated servicing cost for the year amounting to just USD 2.7bn amid no Eurobond redemptions. The VRI derivatives (linked to Ukraine’s future GDP performance) fell 0.4% to 29.8/30.8 cents on the dollar.

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Alexander Klymchuk, Head of Sales, [email protected]
Dmitry Churin, Head of Research, [email protected]